America's largest department store chain pleasantly surprised Wall Street last week by announcing plans to close 100 stores. At 12 percent of its total store base, that's more locations than it shuttered during all of the last six years. Macy's shares spiked 17 percent on the news, as investors shrugged off a sixth straight quarter of declining same-store sales.

Cheers, Not Jeers

Macy's shares bounced 17% after announcing it would close 100 stores

Source: Bloomberg

Intraday times are displayed in ET.

It was a long time coming. Macy's has too many stores, and it needed to close nearly all those locations just to bring the chain's productivity levels back to where they were in 2006, according to a report from real estate research firm Green Street Advisors. The question is, will the praise hoisted upon Macy's for taking its medicine provide enough incentive -- or cover -- for its competitors to follow suit?

Shut Down

Percentage of existing store base retailers would need to close to achieve 2006 sales per square foot

Source: Green Street Advisors

*Does not include Macy's recent store closure announcement
Sales per square foot is adjusted for inflation

Based on Green Street's analysis, J.C. Penney would need to shut down 320 of its 1,000 stores and Sears would need to close 300 of its 700 locations to bring productivity levels back to where they were a decade ago. Nordstrom, Dillards and Bon-Ton would need to collectively shutter another 130 stores.

Green Street's report focused on mall anchors, so it didn't provide an estimate for Kohl's, which operates 1,200 stores mostly outside malls and said last week it didn't expect closures in 2017. (Kohl's shut 18 stores in February). CEO Kevin Mansell said it wanted to wait out the holiday season before it decides whether it will go further on closings and that fewer stores "are not going to be a ticket to success."

United States of Stores

America has more retail square footage than Australia, the U.K., Germany and Mexico combined

Source: ICSC, Morgan Stanley Research

According to Mansell, stores are actually becoming more relevant to Kohl's as a fifth of its products are bought online but picked up at brick-and-mortar locations. Having "distribution points" as digital becomes a bigger part of everyone's business is important, added Kohl's CFO Wesley McDonald.

But wait a second. If you're talking about "distribution points," wouldn't warehouses do? They don't require the same kind of cost outlays that come with running a retail store's customer service, staffing, systems, and marketing. Nor do they have to be located in storefronts with expensive lease payments. But anyway, Kohl's went on to explain how they assess closing locations, looking for stores with expiring leases that no longer bring in incremental cash flow.

Which brings us back to why what Macy's did is a step in the right direction.

Macy's said the 100 stores it identified were all cash flow positive, meaning the stores were bringing in money. The company is closing them anyway because their profitability and sales are declining, weighing on the overall business. Some of the locations are worth more as real estate than as retail. Moreover, trying to fix ailing stores saps management's attention at a time when it should be focused on the crucial job of building the business for the future.

Diminishing Returns

The more stores retailers build, the less productive their store base becomes

Source: Morgan Stanley Research

Note: Data based on a basket of 24 hardline and broadline retailers including Walmart, Target, Home Depot, and Lowe's

Macy's estimated that a big chunk of the lost sales from shuttered locations would be absorbed through its website or nearby stores, so in total, closing 12 percent of its store basis would mean a reduction of just 3 percent of annual sales (or about $1 billion). And eventually, the cost savings from slimming down should boost profit.

There's still a need for physical stores. Just maybe not so much of them, especially at a time when retailers' only sales growth is coming from digital channels. And while retailers might say physical stores bring in more than what can be measured by sales per square foot -- namely brand-building, name recognition and higher engagement with customers -- I'm still wary of lending too much credence to soft attributes that can't be measured.

Like Kohl's, many of the other U.S. department store chains said last week that they didn't have plans to mimic Macy's store closing decisions. J.C. Penney even said it's betting on Macy's store closures to help drive customers to its own chain. But if sales and profits continue to fall at their brick-and-mortar locations, they may no longer have a choice. It could be a smarter move to play follow the leader sooner rather than later.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.